Is Gujarat Ambuja Exports (NSE:GAEL) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Gujarat Ambuja Exports Limited (NSE:GAEL) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Gujarat Ambuja Exports

What Is Gujarat Ambuja Exports's Debt?

The image below, which you can click on for greater detail, shows that Gujarat Ambuja Exports had debt of ₹1.97b at the end of March 2024, a reduction from ₹2.27b over a year. But on the other hand it also has ₹6.88b in cash, leading to a ₹4.91b net cash position.

How Strong Is Gujarat Ambuja Exports' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gujarat Ambuja Exports had liabilities of ₹4.39b due within 12 months and liabilities of ₹964.4m due beyond that. Offsetting this, it had ₹6.88b in cash and ₹3.29b in receivables that were due within 12 months. So it actually has ₹4.82b more liquid assets than total liabilities.

This surplus suggests that Gujarat Ambuja Exports has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Gujarat Ambuja Exports boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Gujarat Ambuja Exports grew its EBIT by 4.9% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Gujarat Ambuja Exports can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Gujarat Ambuja Exports may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Gujarat Ambuja Exports created free cash flow amounting to 7.0% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gujarat Ambuja Exports has ₹4.91b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 4.9% over the last year. So we don't have any problem with Gujarat Ambuja Exports's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Gujarat Ambuja Exports has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.